problemset08answers

problemset08answers - Answers to Problem Set 7 Chapter 14...

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Answers to Problem Set 7 Chapter 14, Solution 2. Something will double in cost in 10 years when the value of the money has decreased by exactly one half. Thus: (1 + f) 10 = 2 (1 + f) = 2 0.1 = 1.0718 f = 7.2% per year Chapter 14, Solution 4. Then-current dollars = 10,000(1 + 0.07) 10 = $19,672. (So “then-current dollars” refers to the amount of money need in year 10 to have 10,000 real dollars in year 10. ) Chapter 14, Solution 5. Let CV = current value CV 0 = 10,000/(1 + 0.07) 10 = $5083.49 Chapter 14, Solution 6. Find inflation rate and then convert dollars to CV dollars: 0.03 + f + 0.03(f) = 0.12 1.03f = 0.09 f = 8.74% CV 0 = 10,000/(1 + 0.0874) 10 = $4326.20 Chapter 14, Solution 7. CV 0 for amt in yr 1 = 13,000/(1 + 0.06) 1 = $12,264 CV 0 for amt in yr 2 = 13,000/(1 + 0.06) 2 = $11,570 CV 0 for amt in yr 3 = 13,000/(1 + 0.06) 3 = $10,915 Number of future dollars = 2000(1 + 0.05) 5 = $2552.56 Chapter 14, Solution 18. Market rate per 6 months = 0.22/2 = 11% 0.11 = i + 0.07 + (i)(0.07) 1.07i = 0.04 i = 3.74% per six months Chapter 14, Solution 21.
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Find present worth of all three plans: Method 1: PW 1 = $400,000 Method 2: i
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